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Money Times - September 15, 2015

Posted by Jill Kerby on September 15 2015 @ 09:00

 

WE’RE SAVING MORE…AND SPENDING MORE

 

Europe is full of savers. So is Ireland. According to Eurostat the gross household savings rate in the 19 state eurozone to the end of 2014 averaged 12.71% and 10.56% in all 28-member countries. Here, at the end of 2014, it was 12.69%.

Even though the rate has come down slightly in recent years, savings are still relatively high on average because the EU is a two or even three tier economic club and the wealthy countries are clearly distorting the statistics: Sweden comes in at the top with a whopping savings rate of 18.26%, followed by Germany (16.26%), the Netherlands (14.84%), France (14.72%), Belgium (13.47%) and Austria (12.84%). The Swiss outrank everyone with a 21.99% rate but even we are still saving c12.7% (up to the end of 2014). 

Meanwhile countries like Latvia, Lithuania, Cyprus, Greece and Poland all have low digit (or even negative) savings rates which reflect their serious or ongoing economic problems, while others – like Denmark and the UK, both outside the euro currency area, with just half the household savings rate we have – represent relatively strong economies with low unemployment and far more confident consumers.

The really high savers – the Swiss, Swedes, Germans, Dutch, French, Belgians and Austrians – represent another narrative:  the Germanic speakers have relatively low unemployment (though not Sweden) and relatively strong GDP; but they also have ageing populations. The French and Belgians have high unemployment, especially youth unemployment, massive public debt and a very large cohort of older people.  None of this is conducive to a lot of spending, even in countries where social services for older people are generous. 

Overall, the volume of EU saving is not as high as it was, but this reflects the continuing, steady, paying down of debt (especially in Spain, Portugal, Ireland and Greece) more than it does any great explosion of spending.

We in Ireland seem to defy nearly all of these patterns. Last week, the UK building society Nationwide UK (Ireland), that produces a regular Savings Index, reported that 27% more people – most of them older - are unhappy with the very high deposit interest tax (41%-44%) paid here on their savings. Yet there is also a 2% increase in the positive saving sentiment (51%), reflecting perhaps the improved confidence in the economy generally and the fact that consumer spending here is up 2.8% over the past year.  By European standards our economy – GDP is up 6.7% over the past 12 months and GNP by 5.3% GNP – is positively booming (mainly thanks to low oil prices and the low euro for exports).

That consumer statistic is also more nuanced. It reflects all the new households created by the newly employed rather than widespread consumer confidence. We shouldn’t look gift horses in the mouth, but there are too many communities that the new jobs and consumer mini-boom have passed by.

These communities, often over-represented of older people, are certainly propping up the household saving statistics, joined by cohort of younger savers securing new jobs and keen to start nesting; they need to put together 20% of the price of a new home under the Central Bank’s mortgage lending rules.

So who is offering the best deposit rates right now?

Unfortunately, that picture is the least rosy of all. On the same day that the Nationwide UK (Ireland) savings survey came out, KBC Bank announced yet another variable interest rate cut for new home-borrowers.  As borrowing rates continue to fall (albeit very slowly) this could spell more bad news for savers. KBC’s ‘easy access’ demand rate on a minimum deposit of €3,000 is just 1.25% and just 0.5% on sums over €100,000 and their fixed rates (up to 18 months) are as little as 1.1% - 1.2% but with Nationwide UK (Ireland) are among the best on the market.

You’ll do a little better with a notice account of 30 or 90 days with RaboDirect. It’s offering between 1.25% and 1.45% interest. Meanwhile, the best rates continue on monthly savings of up to €1,000 from EBS (2.25%), KBC Bank (3%) and Nationwide UK (Ireland) (4%).

Only State Savings offer DIRT-free returns, but you will still have to tie up your money for at least 10 years with An Post to achieve a 2.25% annual return. Their four year bond is providing just 0.99% per annum net.

“There is no deposit yield worth talking about anymore,” a financial adviser told me last week. He described how older clients even very wealthy ones “are astonished” at how much investment risk (that includes ‘safe’ cash, bonds and an annuity in addition to some shares) they must accept if they want to achieve even a modest but sustainable long-term annual return of just 3%.

Notoriously reluctant to make predictions, he made this one:  “There is no sign that central bank base rates – which influence retail rates – are on their way up.” 

We’ll know for sure on Thursday, when the US Federal Reserve date meets again to decide if they’ll hike the US rate for the first time in 10 years.

If you have a personal finance question for Jill, please email her at jill@jillkerby.ie or write to her c/o this paper.

 

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